Bi-Tech North Inc v. Lockheed Martin Corp

Opinion

Filed: April 12, 2005

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 04-1391 (CA-01-254-AW)

BI-TECH NORTH, INCORPORATED, a New Hampshire Corporation,

Plaintiff - Appellant,

and

WILLIAM SHERLOCK; BI-TECH, INCORPORATED, a New Jersey Corporation,

Plaintiffs,

versus

LOCKHEED MARTIN CORPORATION, a Maryland Corporation acting through its Sanders Business Unit,

Defendant - Appellee.

O R D E R

The court amends its opinion filed March 10, 2005, as follows:

On the cover sheet, section 8, line 5 -- the names of Juanita

A. Crowley, Paul R. Q. Wolfson, Edward N. Siskel, WILMER, CUTLER,

PICKERING, HALE AND DORR, L.L.P., Washington, D.C., are added as

counsel for Appellee.

For the Court - By Direction

/s/ Patricia S. Connor Clerk UNPUBLISHED

UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

No. 04-1391

WILLIAM SHERLOCK; BI-TECH, INCORPORATED, a New Jersey Corporation,

LOCKHEED MARTIN CORPORATION, a Maryland Corporation acting through its Sanders Business Unit,

Appeal from the United States District Court for the District of Maryland, at Greenbelt. Alexander Williams, Jr., District Judge. (CA-01-254-AW)

Argued: November 30, 2004 Decided: March 10, 2005

Before WIDENER, MICHAEL, and MOTZ, Circuit Judges.

Affirmed by unpublished per curiam opinion.

ARGUED: Peter David Goldberger, Ardmore, Pennsylvania, for Appellant. Francis Joseph Gorman, GORMAN & WILLIAMS, Baltimore, Maryland, for Appellee. ON BRIEF: Neil E. Jokelson, David Jokelson, Derek Jokelson, NEIL E. JOKELSON & ASSOCIATES, Philadelphia, Pennsylvania, for Appellant. Juanita A. Crowley, Paul R. Q. Wolfson, Edward N. Siskel, WILMER, CUTLER, PICKERING, HALE AND DORR, L.L.P., Washington, D.C. for Appellee.

Unpublished opinions are not binding precedent in this circuit. See Local Rule 36(c).

2 PER CURIAM

In this diversity contract and tort action, we affirm the

district court’s grant of summary judgment to Lockheed Martin Corp.

and denial of partial summary judgment to Bi-Tech North, Inc.

(“BTN”).

I.

In March 1998, William Sherlock, the principal in Bi-Tech,

Inc. (“BTI”), a machine shop, began negotiations with a unit of

Lockheed to buy from Lockheed the Manchester Machine Center

(“MMC”).

In late December 1999 and early January 2000, the parties

executed documents that provided, inter alia, that BTN, a New

Hampshire corporation created for the purpose of the purchase,

would buy MMC from Lockheed for $500,000--a $100,000 down payment,

with the remaining $400,000 to be paid in equal monthly

installments for one year, pursuant to the terms of a promissory

note (the “Note”). BTN would pay $310,000 to lease the building

housing MMC for one year, with options to renew at a lower rate or

to purchase for $2.1 million. BTN would continue to employ

designated MMC employees at (at least) the same pay and with (at

least) the same benefits. Also, Lockheed would have a priority

security interest in the assets transferred to BTN, which BTN could

not further encumber; and BTI would guarantee BTN’s payment of the

3 Note and performance of all obligations under the agreement. While

the agreement became effective December 23, 1999, the deal was not

to close until January 3, 2000.

A few provisions of the agreement are important here:

1. Article IX lists “Conditions to Closing.” Section 9.03(a)

conditions Lockheed’s obligations on BTI’s and BTN’s

performance of its obligations under the agreement and

conditioned Lockheed’s performance on the truth and

correctness (in all material respects) of BTI’s and BTN’s

representations and warranties contained in the transaction

documents. Section 9.03(c)(iii) conditions Lockheed’s

obligations on BTN having provided to Lockheed “reasonable

assurances” that BTN had in place “sufficient financial

resources to satisfy the Promissory Note and to satisfy and

perform its other obligations under the Transaction

Documents.”

2. Article IV lists the “Representations and Warranties” of BTN

and BTI. Section 4.01(e) represents and warrants that each

was “capable of performing, in all material respects, each

agreement, covenant and obligation required by the Transaction

Documents” and that at the time of the transactions, BTN would

have “the resources and assets necessary and sufficient to

conduct the [business of MMC] and to perform its obligations

and Contracts that constitute Transferred Assets.” Section

4 4.01(h) represents and warrants that BTN had “available to it

cash, marketable securities or other investments, or presently

available sources of credit, to enable it to consummate the

Contemplated Transactions and to pay the Purchase Price.”

3. Article XI governs termination. Section 11.01(b) controls

termination if the deal has not closed by January 15, 2000,

and allows immediate termination by either Lockheed or BTN at

any time prior to closing. The sole exception to this

prerogative is if the closing is not consummated by January 15

because of the terminating party’s breach of any of the

representations or warranties or its failure to perform the

covenants or agreements contained in the Transaction

Documents. Section 11.01(d) is an alternative termination

provision, not dependent on the failure of the deal to close

by January 15. It allows termination because of a breach of

any representation, warranty, covenant, or agreement under the

Transaction Documents, if the effect of the breach “would

cause the closing conditions of the terminating party not to

be capable of being satisfied,” and if the breach is not cured

by the breaching party within 15 days of receiving written

notice of the breach from the terminating party.

The parties agree that Maryland law governs the contract.

BTN began to install new phones and signs at MMC, obtained

insurance coverage, and secured signed acceptances of employment

5 from the designated MMC employees. Sherlock also contacted Joseph

Franchetti about a possible loan of $200,000 or more for working

capital. The terms of the proposed loan were, however, onerous:

the interest rate on the loan would be 20%; Franchetti would be

entitled to 10% of net profit after taxes and would become a board

member with a monthly retainer.

The Lockheed/BTN deal did not close on January 3, 2000, and on

January 5, Lockheed’s in-house counsel sent a handwritten note to

Sherlock listing open action items, including “evidence of

financial capability.” On January 7, 2000, BTN’s attorney

forwarded to Lockheed’s outside counsel materials addressing some

of the open action items. Included was a letter from GE Capital to

Sherlock stating that it was “in the process of completing [the]

review of [Sherlock’s] request for a $750,000 working capital

line.” GE Capital asked for a copy of the executed purchase

agreement, and “[v]erification from Lockheed management as to the

invoicing and payment terms.” It further proposed a January 10

meeting. The meeting did not occur.

On January 12, Sherlock’s consultant calculated that BTN would

require $218,000 in working capital to operate MMC for the first

month. At a meeting with Sherlock on January 12, Lockheed said

that a $600,000 letter of credit would satisfy BTN’s obligations

under § 9.03(c)(iii) of the contract. Sherlock indicated that he

would look into the issue and intended to talk to his attorney

6 about whether he needed to post additional funds.

By January 14, Sherlock had tendered $50,000 of the $100,000

down payment. On January 14, Lockheed sent Sherlock a letter

informing him that, pursuant to the terms of the agreement,

Lockheed would exercise its termination rights unless Sherlock had

provided, by January 15, the remaining $50,000 of the down payment

and “written evidence that [BTN] has access to a minimum of

$600,000” via a signed letter of credit. Sherlock’s attorney

replied that the requirement of proof of access to $600,000

“appears to be a breach of the transaction agreements,” but that

Sherlock was ready, willing, and able to forward by wire transfer

the remaining balance of the downpayment. On January 15, Sherlock

wrote to Lockheed offering to contact banks to get financing and

offering as collateral his vacation home, which he valued at $1.6

million.1 Lockheed terminated the agreement by letter dated

January 18, 2000.

Lockheed later sold MMC to another purchaser, PGM. BTN points

to evidence of phone calls between Lockheed and PGM during early

January 2000 as suggesting that Lockheed was negotiating a deal

with PGM before the termination of the BTN deal.

1 Sherlock’s actual equity in the house appears to have been significantly less than that. In his April 2000 Petition for Bankruptcy, Sherlock valued the property at $900,000, and noted a $750,000 mortgage on the property.

7 II.

In January 2001, BTN, BTI, and Sherlock filed suit against

Lockheed in the United States District Court for the District of

Maryland, asserting breach of contract and various tort claims.

Lockheed filed counterclaims against BTN, BTI, and Sherlock. In

May 2001, Sherlock filed a Suggestion of Bankruptcy, and, in August

2001, the district court ordered the case to go forward except as

to the counterclaim against Sherlock.2

By February 2004, BTN’s remaining claims against Lockheed were

for breach of contract, detrimental reliance, breach of

confidential duty, fraud, conspiracy to defraud, and tortious

interference with prospective business relations. On February 25,

2004, the district court granted Lockheed’s motion for summary

judgment on these claims, and denied BTN’s motion for partial

summary judgment on its breach of contract claim. In an order

dated May 5, 2004, the district court dismissed with prejudice

Sherlock’s and BTI’s claims against Lockheed; dismissed without

prejudice Lockheed’s counterclaims against BTI and Sherlock;

designated the February 25, 2004 Order as the final judgment as to

BTN’s claims; and stayed Lockheed’s counterclaim against BTN

pending BTN’s appeal to this court. Only BTN appeals; it appeals

the grant of summary judgment on the breach of contract and tort

2 Sherlock’s Petition for Bankruptcy in the District of New Jersey has since been voluntarily dismissed.

8 claims, and the denial of its own motion for partial summary

judgment on its breach of contract claim. BTN does not appeal the

grant of summary judgment on the quasi-contract claim of

detrimental reliance.

III.

We review the district court’s grant of summary judgment de

novo, viewing the facts in the light most favorable to the non-

moving party. Blaustein & Reich v. Buckles, 365 F.3d 281, 286 (4th

Cir. 2004).

A.

As the district court correctly noted, Maryland law holds that

no duty arises under a contract if a condition precedent is

unfulfilled. See Laurel Race Course, Inc. v. Regal Constr. Co.,

333 A.2d 319, 327 (Md. 1975). Thus, if BTN did not satisfy the

conditions precedent of §§ 9.03(a) and 9.03(c)(iii), and its

nonperformance is not excused, it cannot recover for breach of

contract, and the district court properly granted summary judgment

to Lockheed. See Hubler Rentals, Inc. v. Roadway Express, Inc.,

637 F.2d 257, 260-61 (4th Cir. 1981).

(1)

The record reveals that BTI and BTN did not satisfy § 9.03(a)

or § 9.03(c)(iii).

As to § 9.03(a), contrary to the representations and

9 warranties in §§ 4.01(e) & (h), neither BTN nor BTI had sufficient

resources and assets at the time of the transactions to conduct

MMC’s business or to consummate the contemplated transactions.

Indeed, BTN had no assets at all when the Transaction Agreement

became effective on December 23, 1999, and would not have had any

until the transfer of MMC’s assets to BTN’s control, which was

supposed to occur on January 6, 2000. Moreover, there was an

outstanding judgment of foreclosure of more than $1 million against

BTI, and BTI’s bank account had a negative balance.

Nor did BTN or BTI satisfy § 9.03(c)(iii). That section of

the contract requires BTN to provide Lockheed with “reasonable

assurances” that BTN had sufficient financial resources available

to satisfy the Note and perform its obligations under the contract.

BTN argues that there are material factual issues as to whether it

satisfied this condition precedent, because (1) the Security

Agreement in and of itself could constitute the required

“reasonable assurances;” or (2) “Sherlock was prepared to complete

the down payment, . . . BTN had already taken major steps toward

assuming the business, . . . Lockheed had discussed the short-term

working capital needs of BTN with Franchetti, who was willing to

meet them . . . , and . . . the MMC deal was otherwise self-

financing.”

But it is a fundamental principle of contract law that a

contract should be construed so that each provision has meaning,

10 and no provision is mere surplusage. See, e.g., JMP Assocs. v. St.

Paul Fire & Marine Ins. Co., 693 A.2d 832, 834-35 (Md. 1997). If

we should construe the Security Agreement (or any other obligation

in the Transaction Documents) to have satisfied the “reasonable

assurances” requirement, then that would render § 9.03(c)(iii)

superfluous. Section 9.03(c)(iii) requires “reasonable assurances”

in addition to the other requirements of the contract.

Moreover, BTN’s signage and potential contracts did not assure

“sufficient financial resources” to meet BTN’s obligations,

especially in the short-term. Similarly, the understanding that

the deal would become self-financing did not assure that BTN had

the working capital to run the shop for the first month or two.

And Sherlock never offered the potential Franchetti loan to

Lockheed as a “reasonable assurance.” Thus, these factors could

not constitute “reasonable assurances.”

The only counterproposal that Sherlock made to Lockheed’s

request for a $600,000 letter of credit was to offer his vacation

home as collateral. According to Sherlock’s bankruptcy petition,

this house was worth $900,000 and was encumbered by a $750,000

mortgage. Even if the bare offer of this house as collateral could

be considered an assurance, the value of that property was

significantly less than the $218,000 that Sherlock’s own consultant

stated would be needed to run the shop for the first month. Thus,

it could not have been a “reasonable assurance” that BTN had

11 sufficient resources to satisfy the $400,000 Note and the other

obligations under the agreement.

Because BTI and BTN did not satisfy the conditions precedent

of §§ 9.03(a) and § 9.03(c)(iii), Lockheed did not have a duty to

perform under the contract.

(2)

Alternatively, BTN argues that Lockheed repudiated the

contract in its January 14, 2000 letter, thus excusing BTI’s and

BTN’s failure to fulfill the conditions precedent, and consequently

allowing BTN to recover for Lockheed’s asserted anticipatory

breach.3 The January 14 letter stated that “per terms of [the]

agreement,” if, by close of business January 15, 2000, Sherlock did

not tender the remainder of the down payment and submit “written

evidence that [BTN] has access to a minimum of $600,000 via a

3 BTN also argues that Lockheed fraudulently concealed material information and did not negotiate in good faith, because, inter alia, Lockheed was allegedly simultaneously negotiating with PGM. BTN asserts that this excused it from performing the conditions precedent. However, there is no authority for BTN’s suggestion that there is a generalized fraud exception to the rule that the failure of a party to perform conditions precedent excuses the other party from its performance under the contract. Of course, if a party’s fraud or bad faith causes the other party to be unable to perform a condition of the contract, then the nonperformance of the condition is excused. See Williston on Contracts § 39.10 (4th ed.) (“Although it is not necessary that there be a specific malevolent intent, the weight of authority holds that in order for prevention to constitute an excuse for nonperformance of a condition or a promise, the preventing party must have deliberately taken steps to impede performance or have arbitrarily impaired the other party's ability to perform.”). However, BTN fails to show that Lockheed’s alleged fraud or bad faith caused BTN’s failure to provide reasonable assurances as required under § 9.03(c)(iii).

12 signed Letter of Credit” from a bank, Lockheed would “have no

alternative but to terminate the deal.”

“Ordinarily, in order to constitute anticipatory repudiation,

there must be a definite, specific, positive, and unconditional

repudiation of the contract by one of the parties to the contract.”

C.W. Blomquist & Co. v. Capital Area Realty Investors Corp., 311

A.2d 787, 791 (Md. 1973). A party repudiates a contract if it

demands performance to which it is not entitled, and states

unequivocally that it will not perform unless the demand is

satisfied. WBZE, Inc. v. Arab Network of America, 220 B.R. 568,

572 (D. Md. 1998) (citing Corbin on Contracts § 973 at 910 (1951)).

Section 11.01(b) of the contract entitled Lockheed to

“reasonable assurances” by January 15, 2000; without such

assurances either party could unilaterally and immediately

terminate. Lockheed’s request that BTN establish a $600,000 line

of credit did not amount to a repudiation of the contract if that

request plausibly constituted a request for “reasonable assurances”

under the contract. See LAK, Inc. v. Deer Creek Enters., 976 F.2d

328, 332-34 (7th Cir. 1992) (holding that, in determining whether

there was an anticipatory breach, the court must look to the

provision of the contract under which the dispute arises and

determine whether the allegedly breaching party was “offering to

perform in accordance with its own interpretation” of that

provision and if “that interpretation was plausible”).

13 In this case, Lockheed’s determination that a $600,000 line of

credit would satisfy § 9.03(c)(iii) was neither implausible, nor

even unreasonable. The contract required “reasonable assurances”

that BTN could pay the $400,000 Note and satisfy the other

obligations of the contract, which included the running of the

machine shop. As explained above, the Security Agreement, which

secured the Note, could not in itself satisfy the “reasonable

assurances” requirement. Lockheed requested a line of credit that

equaled the amount of the Note, plus $200,000, an approximation of

the amount necessary to run the shop for one month--and it is

undisputed that it would be at least one month before the shop

could realize a profit. Moreover, as evidence of ability to meet

BTN’s financial obligations, Sherlock had proffered a letter

indicating that he had requested a $750,000 line of credit from GE

Capital. Thus, Sherlock himself seems to have contemplated that a

line of credit for $150,000 more than Lockheed eventually demanded

might be necessary to provide “reasonable assurances.”

Finally, Lockheed can only have repudiated the contract if BTN

was ready and willing to provide “reasonable assurances” by the

January 15 deadline. See Wischhusen v. Am. Med. Spirits Co., 163

A.2d 685, 687 (Md. 1933). To provide these assurances, Sherlock

would, at least, have had to accept Franchetti’s loan. However,

not only was Sherlock unwilling to accept the loan, but also both

he and his attorney repeatedly expressed a belief that Sherlock was

14 obligated to do no more under the contract than tender the down

payment. BTN’s contention that Sherlock would ultimately have

accepted the Franchetti loan is belied by the fact that he did not

do so before the close of business on January 15, 2000, although

Lockheed had informed him that it would likely exercise its

termination rights if the deal had not closed by that deadline.

Because Lockheed did not repudiate the contract, repudiation

does not excuse BTN’s failure to satisfy the conditions precedent,

and BTN cannot maintain a suit for breach of contract.4

B.

BTN also appeals the district court’s grant of summary

judgment to Lockheed on BTN’s tort claims. We have reviewed the

record, briefs, and applicable case law, and we have heard oral

argument. We are convinced that the district court properly

resolved these claims. See Sherlock v. Lockheed Martin Corp.,

Civil Action No. AW-01-254 (D. Md. Feb. 25, 2004).

IV.

For these reasons, the judgment of the district court is

AFFIRMED.

4 Our resolution of this issue also disposes of BTN’s appeal of the district court’s denial of its motion for partial summary judgment on the breach of contract claim.